An assessment of Greece going bankrupt on September 2011

2011-09-14

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The calamities a Greek default would bring on the Euro today force European leaders to keep Greece above water, even though it is a common secret that this policy can only buy time until the inevitable happens. Image Source: Spiegel

UPDATE:Greek default: Optimal and suboptimal choices – Full analysis

The probability of a Greek default as I am writing this is 98%. There is immense speculation that Greece will default within this month (September) and there have been a series of rumors that Germany is preparing for the event. To put everything into context, Greece is practically bankrupt since May 2010 (a year and a half ago). Ever since it has “survived” with money coming from the EFSF. I have long been advocating that Greece would never be able to avoid a formal default under the regime of Voodoo economics that characterizes the self-defeating austerity obsession that permeates European action.

I have previously explained the dual nature of the Greek crisis namely the fact that Greece faces on one hand a non-sustainable public debt and budget deficit which can only be fixed with fiscal consolidation policies, and on the other it has a very problematic economy that is not growing (and with the necessary fiscal consolidation, which has contractionary effects, it cannot do so). Greece is in a vicious cycle, where a solution to a problem creates more problems in parallel. The country has fallen into an austerity vortex, where the real economy is on a free fall and the state is in desperate need for more money (thus new taxes) which eventually lead the Greek economy (and society) deeper into the vortex. Without willing to repeat what I have explained on a series of occasions about the crisis in Greece, I will only say that Greece will definitely default (even with a second bailout which will be structured similarly to the first). As for the reasons that Greece failed recently to meet its budget targets those are related to the overall slowdown in the European and global economy and to the fact that the budget targets were over-optimistic and failed to estimate the contractionary effects of strict(er) austerity.

Now coming to September 2011 and the high chance of a Greek default. I believe that the inevitable will not happen yet and Greece will eventually receive the next tranche of loans. The reason I say that is because French and German banks are still exposed to the Greek debt and a default today would signal the start of a chain effect that would see France and Germany being forced to directly bail out their own banks, which would imply that their public finances would worsen with all the negative implications this can have on their credit rating and the overall stability of the eurozone and the EFSF – and if the eurozone and the EFSF destabilize then the crisis will worsen in the weaker parts of the euro area, Italy, Spain, Portugal, Ireland, Cyprus and then Belgium will be brought in as well.

The calamities a Greek default would bring on the Euro today force European leaders to keep Greece above water, even though it is a common secret that this policy can only buy time until the inevitable happens. A Greek default will only occur when French and German banks are as safe as possible, which again might not be enough to avoid a domino effect (yet this we shall evaluate when the time comes closer).

The only factor that can change everything towards a positive direction, is an overall change in strategy, that will accept the systemic nature of the crisis and the need for system-wide solutions that will address all three dimensions of the crisis: (a) debt crisis across the eurozone, (b) quasi-bankrupt banking sector crisis, (c) under-investment crisis, all over the euro area, with few exceptions, but especially in the periphery.

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